Stop-go – cogeneration in Spain at a crossroads

Favourable legislation led to a very successful period for the development of cogeneration in Spain in the 1990s, but this was brought to a halt towards the end of the decade. Here Montserrat Viladrich-Grau and Joan Vila Simàƒ³n look at the rather uncertain prospects for the future.

The Spanish electricity market is in a critical state of flux. The rate of increase in the consumption of electricity is accelerating and the demand for electricity has grown at between 4% and 7% in the last decade1 (demand in 2006 was for 252,878 GWh). On the generation side, nuclear technology has remained unchanged in the last decade with an installed capacity of 7716 MW in 2007, generating close to 60,000 GWh/year; this represents roughly 18% of the energy generated and 9.8% of installed capacity.


Trigeneration takes off at Madrid Barajas airport (Wärtsilä)
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Coal generation, far from diminishing, has increased slightly in relative importance to compensate for the increase in electrical demand; at 11,424 MW it currently represents 14.5% of installed capacity. Simple-cycle power plants using petroleum derivatives such as heavy fuel oil have maintained their production near 23,000 GWh/year.

Gas generation technologies, along with combined cycle plants and wind generation, have increased both their total and relative position in the Spanish system. The importance of gas has increased from 7.7% in 1998 to 27.3% in 2005, with a level of total power generation similar to that of coal. Wind energy has increased in recent years to an installed capacity of 11,125 MW in 2006, generating an annual total of 22,294 GWh. Finally, hydro power (hydraulic energy) generation is extremely variable, with percentages ranging from 6.6% to 16.6% and with an installed capacity of 16,657 MW.

In theory, the Spanish electrical system is liberalized and based on a marginalist determination of price. The price of electricity is determined each hour in a market of generators and distributors. Law 54/19971 organized and regulated the electrical energy generation market and established the Iberian Energy Market Operator, Operador del Mercado Ibérico de Energàƒ­a SA (OMEL), as the administrator of the Spanish electricity market. This company is charged with evaluating and approving sales offers made during each programming period by the owners of generation plants and vendors, as well as matching these sales offers with acquisition demands.

OMEL purchases from the generators in an orderly manner, buying first from the operator that offers the lower price. The hourly market price is determined by the price charged by the last generation plant needed to meet the demand. This price is paid to all the other producers that sold kilowatt hours at that hour at the lower prices.

TWO TYPES OF GENERATOR

There are two main types of generators in the Spanish electrical market. The first are those in the ordinary framework, with 57,910 MW and representing 73.5% of installed capacity. This group includes all the large utilities. There are up to five large electricity generation companies, geographically distributed throughout Spain (Table 1).

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The second type are generators in the special framework (Régimen Especial), which includes cogeneration installations with an installed capacity under 50 MW together with wind, solar and other renewable energy power plants which, with 20,380 MW, represent 26.5% of the installed capacity.2

The mean price of electricity in the pool, or generation market, varied between 2.564 eurocents/kWh in 1998 to 5.569 eurocents/kWh in 2006 (Table 2).

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In practice, the market has functioned irregularly in the last two years to such an extent that the most of 2005 and the first half of 2006 were characterized by extremely high prices and, starting in April 2006, by extremely low prices.

Furthermore, under the Régimen Especial, both renewable energy and cogeneration are provided with price subsidies to promote development. Law RD 436/20043 establishes:

  • the types of generators that qualify
  • the system and size of the price subsidy that each type of generation plant is entitled to receive.

The regulatory structure includes a wide variety of types of generators from wind to cogeneration, including photovoltaic (PV) solar and biomass. The price subsidies are different in each case.

Even though the generation market is liberalized, end consumers pay a regulated price for electricity. This price is established by law. Following Law RD1432/20024, the Spanish Government each year determines the reference electrical rate (Tarifa eléctrica de referencia or TER). This rate serves as a reference for determining several regulated prices such as the price paid by end consumers.

If the price of energy on the generation market is higher than the consumer regulated rate, the law recognizes the right of the generating companies to recover the difference through a mechanism known as deficit billing. This deficit is expected to be paid by the consumers in future years through electrical rate increases (this debt has not yet been included in consumer electricity bills). In recent years, this deficit has increased significantly and the Government has begun the process of changing this regulated rate framework. The regulated price paid by the consumers is expected to disappear in the near future and to be replaced with a more or less liberalized market price mechanism. However, this system has already created large distortions in the electricity market.

On one hand, consumers do not receive adequate price feedback, being unaware that the true price that they pay for the electricity they consume is higher than appears in their bills and which will have to be paid in the future. On the other hand, operators with the right to engage in deficit billing have maximized profits using methods that are unclear both for the consumer and the Government.


Gas engine cogeneration powers a pig waste disposal and recycling plant in Artajona, Navarra province (Wärtsilä)
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A second problem with the Spanish electricity market is its oligopolistic structure, where a small number of sellers dominate. The few large groups that compete in the market are also vertically integrated, and engage simultaneously in generation, distribution and commercialization. Although these companies are in theory separate legal entities, they are integrated into holding companies. This makes it very difficult for truly competitive conditions to arise in the market.

THE EVOLUTION OF COGENERATION

Cogeneration in Spain is located mainly in industrial areas (Table 3). The total cogeneration capacity available in Spain in 2006 was 5875 MW from 860 installations. Cogeneration plants are principally found in industries with intensive energy use (Table 4). Evidence of the presence of cogeneration in the tertiary sector is essentially anecdotal (7.5%), although cogeneration combined with refrigeration (trigeneration) is well-developed.

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With respect to the primary fuel used, natural gas stands out, representing 72% of cogeneration plants and 64% of available capacity. In second place are liquid fuels, the majority being petroleum derivatives such as diesel and gasoline, representing 25% of available capacity. The remaining fuels have limited importance; they are used in 3% of plants and represent 11% of available capacity.

Cogeneration plants can also be studied in terms of installed capacity. In this classification, the most notable aspect is that more than half of the cogeneration plants have a capacity of 1-5 MW. This distribution results in a cogeneration profile made up of many small, low-capacity plants. This is one of the reasons that cogeneration is not currently considered a real option for electricity production on a large scale, since the goal of the majority of these plants is not simply to produce electricity but to reduce energy costs for the companies that install them.


A cogeneration plant for an olive oil processing site near Càƒ³rdoba (Turbomach)
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The technologies most frequently employed for cogeneration are as follows:

  • combined cycle
  • condensed steam turbines
  • internal combustion engines
  • gas turbines with counter-pressure heat recovery.

DEVELOPMENT SINCE 1994

The development of cogeneration began in 1990 in Catalonia, the most industrialized region of Spain. It was backed by Gas Natural, a gas company. Law RD 2366/19945 nurtured cogeneration with such spectacular results that a second law was passed in 1998 (RD 2818/19986), to slow this development. The law was the result of an agreement with the large electric utilities to assure low, stable electricity prices during the introduction of the new European currency, the Euro. The majority of plants constructed between 1998 and 2002 were licensed under RD 2366/1994. Law 2818/1998 established important barriers to the development of new plants such as the limit on generation capacity and especially the transitional nature of economic support.

Since this new law was passed, the growth of cogeneration has been essentially non-existent. The oil crisis of 1999-2000 also contributed to the halt in cogeneration development. The increase in the price of petroleum derivatives, especially natural gas (which is the fuel most widely used in cogeneration plants), together with reductions in electrical rates, caused important losses in the sector. This led to pessimism and a lack of confidence in the profitability of these projects and stalled the development of cogeneration in Spain (Table 5).

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In 2004, law RD 436 emerged as an attempt to provide a new impetus for cogeneration – despite doing so based on an excess of regulation. This law established a more favourable framework for investment. It eliminates the transitory nature of cogeneration support by establishing the duration of economic support from the date the plant is put into operation.

It also promotes the participation of small cogeneration plants in the electricity market. This regulation lays down that the owner of the installation has two options for sale of the power generated within the special regulatory framework: they can sell the majority of the electricity on the market or to a distribution company.

If they sell their production directly to the market, they receive the hourly market price plus two complements – an incentive and a premium. Both the premium and the incentive are defined as a percentage of the TER. These percentages vary depending on the installed capacity and the year the installation became operational. For example, the premium may vary between 30% of the TER for a plant with an installed capacity <10 MW and 5% for plants of greater capacity. A premium of 30% in 2006 was 2.29 Eurocents/kWh and of 5% was 0.38 Eurocents/kWh. The incentive generally represented about 10% of the TER.

Until 2006 the TER was set annually. The TER for 2005 was set at 7.3304 eurocents/kWh and for 2006 at 7.6588 eurocents/kWh. The Spanish government is currently in the process of elaborating a new financing law for the special framework. This new system will not be linked to the TER, but the 2006 special framework rates are being maintained until the new law is enacted.

If, instead, the cogeneration enterprise sells its production directly to a distribution company, it is reimbursed at a regulated price also based on a percentage of the TER. This regulated price does not change with the electrical demand and is the same for all the programming periods. As above, these percentages vary depending on the installed capacity and the year of initial operation of the plant.

The regulated rate for a plant under 1 MW of capacity for the first 10 years of operation would be equal to 80% of the TER (6.1270 eurocents/kWh for 2006). But if the capacity is 10-24 MW, the rate is only 55% (4.2123 Eurocents/kWh for 2006). The enterprises have to decide which option to choose – to sell power on the open market or to a distributor – one year in advance and then fulfil their commitment.

Even given the progress represented by RD 436/2004, there were still several areas where the promotion of cogeneration could have been improved:

  • the incentives and the premiums continue to be applied to energy distributed to the grid and not to the total energy produced
  • the requirement that producers consume a certain amount of their own electrical production was not fully eliminated
  • the premium eligibility was limited to installations under 50 MW, which limited the development of larger cogeneration plants.

The Inquitex plant in Barcelona uses two Rolls Royce Bergen B-gas engines (Rolls-Royce)
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The Spanish government is aware of the lack of development of cogeneration because of the two previous laws and a new law is in the process of being developed, which is supposed to change these retribution mechanisms. At the moment, it seems that the reimbursement system planned for cogeneration enterprises is similar to the existing one – businesses can continue to choose between selling on the daily market or through a distributor.

However, the price supports associated with each generation type will now depend on the hourly period in which the electricity is generated. Currently, the planned rates and the premiums do not appear sufficiently increased to encourage the installation of new cogeneration plants. Nevertheless, it is hoped that the new law will be more favourable to the development of cogeneration.

FUTURE OUTLOOK

The Spanish government’s plans for 2005-2007 are to increase cogeneration capacity by 1150 MW, of which they will probably achieve 75 MW.7 The new law attempts to apply the principles of Directive 2004/8/EC8 more thoroughly, but pressure from the large companies in the electricity generating sector and fear of electrical rate increases have slowed the application of adequate incentives for the development of cogeneration.

On the other hand, wind energy has developed spectacularly in Spain, with an installed capacity of 11,125 MW as of December 2006. The goal is to reach 20,000 MW by the year 2010 and some proposals aim to reach as much as 35,000 MW. However, it would be difficult to achieve a much higher wind capacity. Furthermore, the electricity demand curve has a large daily variation, with a peak/off-peak ratio of 1.53 (far from the 1.28 seen in France) and this must be taken into account. By 2010, the wind energy ceiling will be limited by the inability of the grid to absorb more of this electrical capacity. This is where cogeneration could have a synergistic effect.

In order to increase wind energy capacity, complementary and flexible energy systems such as cogeneration must be developed. Cogeneration can provide greater flexibility and security in critical demand situations. Gas turbines generate electric power during 80% of the year, while internal combustion engines have a mean functional time of 48%. The cogeneration production costs (on a kilowatt-hour basis) for gas turbines are lower than for internal combustion engines once the generation process is underway.

However, internal combustion engines do not have the same start-stop difficulties as gas turbines; they are more flexible and can be turned on and off and respond to the demand requirements much faster and in a less costly way than turbines.

In Spain, there is currently 2226 MW of cogeneration capacity from internal combustion engines, i.e. 42% of the total capacity. These cogeneration plants function only 3500-4000 hours annually, stopping at night and at weekends. At the same time, well-designed industrial installations must be able to function correctly when their cogeneration plants are not generating either electricity or heat.

Therefore, they clearly help to modulate the demand curve; at night, industries consume electricity from the grid and, at peak hours, they generate electricity, providing their excess capacity to the electrical system. If the new electrical fee structure rewards this functionality, cogeneration capacity will increase.

Another limitation to the development of cogeneration in Spain is the low overall number of residential heating hours needed during the year – a figure which is much lower than in other European countries because of the mild climate. However, on one hand, cogeneration combined with refrigeration systems is well developed and, on the other, a series of social changes in Spain (higher income levels, changes in consumer tastes, increased summer work hours) have increased the demand for cooling by the tertiary and residential sectors. Therefore, it seems that meeting these social needs will allow cogeneration to expand.

At the moment, however, the reality is that there are many uncertainties in the Spanish market that will be resolved in the coming months and years. Some of these are national in scope such as:

  • the final draft of the new law governing the special framework and its impact on the creation of new enterprises (not just cogeneration)
  • other types of energy such as wind and solar
  • the impact of the current deficit billing system on consumers and generators
  • the implications of recent corporate operations.

Other unknowns of international scope should be taken into account such as the possible development of a ‘natural gas OPEC’ or the future evolution of carbon trading markets.

Montserrat Viladrich-Grau is Associate Professor at Departament d’Administraciàƒ³ d’Empreses i Gestiàƒ³ Econàƒ²mica dels Recursos Naturals (AEGERN), University of Lleida, Spain.
e-mail: montse.viladrich@aegern.udl.es

Joan Vila Simàƒ³n is Chief Executive Officer at LC Paper 1881, SA, Girona, Spain.
e-mail: jvila@ecopaper.net

References

1. Jefatura del Estado. Ley 54/1997 de 27 de Noviembre de 1997, Boletàƒ­n Oficial del Estado de 28 Noviembre 1997.

2. Data from the websites of Red Eléctrica Espaàƒ±ola (REE) (www.ree.es) and OMEL (www.omel.com).

3. Ministerio de Economàƒ­a. Real Decreto 436/2004 de 12 de marzo de 2004, Boletàƒ­n Oficial del Estado de 8 Abril 2004.

4. Ministerio de Economàƒ­a. Real Decreto 1432/2002 de 27 de Diciembre de 2002, Boletàƒ­n Oficial del Estado de 31 Diciembre 2002.

5. Ministerio de Industria y Energàƒ­a. Real Decreto 2366/1994 de 9 de Diciembre de 1994, Boletàƒ­n Oficial del Estado de 31 Diciembre 1994.

6. Ministerio de Industria y Energàƒ­a. Real Decreto 2818/1998 de 23 de Diciembre de 1998, Boletàƒ­n Oficial del Estado de 30 Diciembre 1998.

7. Ministerio de Medio Ambiente. Plan de Energàƒ­as Renovables 2005-2010. 2005. www.mityc.es/Desarrollo/Seccion/EnergiaRenovable/Plan

8. Directive 2004/8/EC of the European Parliament and of the Council of 11 February 2004 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/EEC.

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